Monday, 25 October 2010

Pending Confirmation of Higher Greek Debt

The events of the past 2 weeks, and notably Eurostat’s delay in releasing its revised figures for the 2009 deficit, as well as the rumours of a possible delay in EUR 110 bln bail-out payment schedule, confirm the thesis that has been proposed in this blog since late 2009:

·that on the one hand, total Greek debt is higher than the amount found in the official figures

·that on the other hand, Greece’s return to the markets in 2013 for the amounts in question—approximately EUR 70-80 bln—will be impossible, or very expensive.

Regarding the first issue, that of the restatement of the 2009 deficit. Numerous media sources have claimed that the deficit will rise from 13% of GDP to 16%. The factors which will be included in the debt include the EUR 5 bln Ethniki swap, as well as higher healthcare spending and debt of certain semi-governmental organisations.

A brief review of the deficit difference–3%, or EUR 7.11 bln—is probable only of one includes the EUR 5 bln swap* plus EUR 2 bln in additional spending. In my opinion, this is insufficient, which is why the announcement has been moved passed the November 7th elections:

·Either the revised estimate of 3% does not include a far higher amount of debt which will be added to the central government books in 2010, or

·Additional debt must be added to the central government books for the period 2006-2008 as well as 2009.

The reasoning behind this is simple: As explained in previous posts, the added debt “transferred” to the central government in 2010 alone is at least EUR 13.8 bln (OGA + OSE), not counting a number of other lines, such as the military industry, healthcare, construction and others.

In order to avoid a “ticker shock”, I fully expect Eurostat to update not just the 2009 deficit, but the deficits going back to 2005. However, at the end of this exercise, I expect Greek central government debt to reach EUR 347 bln at end-2010, or approximately 152% of GDP. (My GDP estimate for 2010 is unchanged at EUR 225 bln. If anything, I regard a 5% real GDP decline as an optimistic case).

This will cause yet another round of shock in the international markets. It is difficult to understand why the ratings agencies and many other forecasters do not reach this conclusion by themselves.

This also creates significant uncertainty for the prospects of Greece’s repayment of the EUR 110 bln bail-out, which is due to start in 2013. I regret to say that I have still not had the time to crunch the numbers on the PDMA website. However, I understand from serious press reports that the minimum debt payment in question in 2013 is at least EUR 70 bln, taking both the bail-out and private sector issues into account.

It is increasingly difficult to see how Greece will borrow EUR 70 bln, given that by end-2012, we can expect debt-to-GDP to be at least 165%, if not 170%. Unless Greece receives a longer grace period, or a 5-year bail-out repayment schedule, or a further bailout from the EUR 750 bln Stabilisation Fund, it does not seem probably that the assumptions on which the bail-out was designed will materialise. In other words, it seems impossible that Greece will be able to return to the markets in this time at an annual interest rate of less than 7-8%. Thus, it seems impossible that Greece will be able to meet loan obligations in the period 2013-2015.

It gives me no pleasure at all to be proven right in what has been an often lonely attempt to consolidate Greek public debt figures and understand the true dimensions of the debt. This is particularly the case when well-respected financial publications such as the Financial Times or The Economist appear to have taken Greek debt figures since March 2010 at their face value.

However, without a proper, unbiased understanding, it is impossible for any government or creditor to begin the process of a debt work-out or restructuring, or to decide on future lending. Although this comes at a critical time, I continue to believe that the sooner we have a full picture, the sooner we can lay the foundations for a real recovery.

In this respect, the bravery with which Ireland and the United Kingdom have recognised their true debt picture and put in place an austerity plan is instructive.

In Greece, the fact that Eurostat has finally been granted audit rights over the Hellenic Statistics Service is a major improvement.

Any investor looking for a market rebound in recent weeks (due to Ethniki’s recapitalisation or Eurobank’s EUR 200 mln interbank borrowing) should be very careful about holding Greek equities one week past the November 7th election.

* NB Determining the true value of the Ethniki swap may be technically difficult, and I would be very interested to see how Eurostat values this trade.

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